Question

Birch Company normally produces and sells 42,000 units of RG-6 each month. The selling price is $20 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $150,000 per month, and fixed selling costs total $40,000 per month.

Employment-contract strikes in the companies that purchase the bulk of the RG-6 units have caused Birch Company’s sales to temporarily drop to only 11,000 units per month. Birch Company estimates that the strikes will last for two months, after which time sales of RG-6 should return to normal. Due to the current low level of sales, Birch Company is thinking about closing down its own plant during the strike, which would reduce its fixed manufacturing overhead costs by $47,000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $12,000. Because Birch Company uses Lean Production methods, no inventories are on hand.

Required:

1. What is the financial advantage (disadvantage) if Birch closes its own plant for two months?

2. Should Birch close the plant for two months?

3. At what level of unit sales for the two-month period would Birch Company be indifferent between closing the plant or keeping it open?

What is the financial advantage (disadvantage) if Birch closes its own plant for two months?

Should Birch close the plant for two months?

	Yesradio button unchecked1 of 2 Noradio button unchecked2 of 2

At what level of unit sales for the two-month period would Birch Company be indifferent between closing the plant or keeping it open?

Unit sales required for Birch to be indifferent

Answer 1

Alternative 1	Keep the Plant Open
Alternative 2	Close The Plant

	Alternative 1	Alternative 2	Differential
Sales	440,000	-
Varaible Costs	220,000	-
Contibution	220,000	-	(220,000.00)
Fixed Manufactring Costs	300,000	206,000	94,000.00
Fixed Selling Costs	80,000	72,000	8,000.00
Startup Cost	-	12,000	(12,000.00)
Net Income	(160,000)	122,000	(130,000.00)

Financial Advantage
Loss in Alternative 1	(160,000.00)
Loss in Alternative 2	(130,000.00)
Financial Advantage of Closing Down	30000.00

2. Yes, Plant should be closed for two months as will benefit from the financial advantage of 30,000.

3.

Indifference Point	Difference in Fixed Cost/Different in Contribution
	Alternative 1	Alternative 2
Fixed Cost
Fixed Manufactring Costs	300,000	206,000
Fixed Selling Costs	80,000	72,000
Startup Cost	-	12,000
	380,000	290,000
Indifference Point	9,000

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